Johnson Service in 1 minute 58 seconds

Good business, bad liabilities

Johnson Service’s operational heart is beating strongly, but its strengths as a business are weighed down by hefty liabilities. Maybe management makes the difference.

Continue reading »

Towards the perfect PE

Exposing Johnson’s beating heart

If you scrape away the nasties, the pension fund, the debt and the operating leases, there’s a perfectly viable business at the heart of Johnson Service on sale at a reasonable price. I reckon it earns a 12% return on capital, also promising investors an earnings yield of about 12%, perhaps more, at the current share price.

Continue reading »

Johnson Service plans next moves

Two steps forward…

Johnson Service‘s results, published in the recent annual report, are a model of consistency. While sales and profits are up and debt is down, the overall effect on some key ratios that determine its financial strength have moved almost imperceptibly. Mind you, that could be a result in the current climate.

Continue reading »

More signs of recovery in T30

But the gloomy economic outlook means managements are not taking anything for granted

T30 member Alumasc’s results confirm modest recovery story. Headlines report more focus, lower pension obligations
Having sold Alumasc Dispense (which made equipment for bars and restaurants) the group is focused on sustainable building products and precision engineering. Debt is up ‘modestly’, but the pension deficit is lower. Dividend held. While the markets spin on tales of economic Armageddon, management is concentrating ‘ on the fundamentals of customer service, costs, cash and market development’.

T30 member Johnson Service confirms its recovery credentials with a good looking set of interim results. Profits and finances appear to be improving
All three divisions, textile rental, dry cleaning, and facilities management are benefiting from investment according to chairman John Talbot, and the company’s expanding, adding new PFI contracts, opening a few new stores and installing dry cleaning pods in supermarket car parks.

Rugged computer and battery supplier Solid State reports trading significantly ahead of last year at its AGM
The Thrifty 30’s star performer has a record order book and expects to prosper in 2011. Beyond that, “the Board is mindful of the broader economic environment and the impact this may have." …Good.

Johnson clean at last

Worth the wait

Johnson Service (JSG) and this blog have a long history, but up until today I’ve never been tempted to add the company to the Thrifty 30 portfolio.

Although the shares looked very cheap, the company, which now mainly operates dry cleaning shops (currently in the throws of a green revolution) and rents out and launders uniforms, protective clothing and linen, was too risky.

In 2007, Dr Keith Anderson outed it as the third cheapest company on the stock market using his statistic, the Naked PE. Its share price then was 68p and the shares got much cheaper, falling as low as 6p a year ago. Today they cost about 20p. Since 2007, Johnson has remained profitable (ignoring exceptional losses) so the shares have been consistently among the cheapest.

Although, in tests, Naked PE shares perform much better than shares identified by the Plain Old PE (POPE), our experience reporting on them through crisis and recession shows that individual Naked PE companies can go bust, and even small portfolios of them can fall so far there’s little prospect of them recovering in value any time soon. They must be treated with caution.

Keith recommends waiting for a signal that implies their chances of survival have improved. Time alone might be sufficient, but I would prefer direct evidence from its financial statements that Johnson is recovering.

It’s been in deep trouble. In May 2008, I chronicled its gradual meltdown as its debt-fuelled acquisition spree came to a juddering halt, and it began to offload companies, and chief executives. The latest, though, restructuring expert John Talbot, was buying shares enthusiastically.

In April 2009, despite Talbot’s relentless pursuit of the shares I decided that the company’s finances were still too weak.

The chart really doesn’t convey the drama of the last few years, in which profits collapsed (you can see that well enough in the eps line), and the value of the company’s assets halved from £410m in 2005 to £211m in 2009. Although the shareholders’ portion of that diminished pool of assets held fast, it was only because they saved the company by buying shares in a £35m placing and open offer.

But that’s all in the past, and we needn’t let the pain shareholders must have felt then, taint our view of the company now. Talbot’s still running the company, and his turnaround expertise seems to be paying off. The company’s started paying a dividend again, and it looks much stronger.

Using figures just published in Johnson’s annual report, the company scores eight out of nine on Piotroski’s F_Score, a measure of financial strength that has a good record of predicting which distressed companies survive and prosper, and which just distress their shareholders.

Compared to last year, and in absolute terms, the company is in much better shape than in 2008, when of course, it was in dire straits. Johnson Service could be the first Naked PE alumnus to make it into the Thrifty 30 portfolio.

There are some caveats though.

The sale of Johnson Clothing in 2007 means Johnson Service is a smaller company now and there are more shares in issue because of a rights issue in 2008. In the near future it’s most unlikely to earn earnings at the unsustainable levels it achieved before 2007. The shares are probably very cheap, but not as cheap as Johnson’s long-term PE of less than one implies: crudely, an annual return for shareholders of over 100%!

But, say this year’s modest profit is indicative of the future. The shares are a still a bargain, costing little more than three times earnings. After the write-offs and restructuring of the last couple of years, they cost less than the book value of the company, making it a classic Piotroski share.

These are good signs. Not as good perhaps, is its overall level of debt, lower than last year, but still quite high at 26% of total assets, and its pension scheme deficit (8% of total assets). Hopefully, Johnson’s cash flow will make mincemeat of these.

Nevertheless, the stats are all lining up, and I’ve added Johnson to the Thrifty 30 portfolio at 19.5p, the actual price quoted by my broker.

Maybe on Wednesday it’ll be joined by a rival, Davis Service, which is also on the Thrifty 30 shortlist. It’s not as cheap as Johnson, but then again, it hasn’t been through the mangle either.

-

Thrifty 30 updates

The current Thrifty 30 portfolio

T Clarke’s results look OK, but I’m not sure about its move into facilities management.